On June 16, the U.S. Federal Reserve’s Open Market Committee concluded its two-day meeting and announced its decisions. The FOMC consists of the seven members of the Board of Governors, the head of the Federal Reserve Bank of New York, and (on a rotating basis) the heads of four of the 11 other Federal Reserve Banks that make up the Federal Reserve System. The four Federal Reserve Bank presidents serve one-year terms.
The only concrete decision announced was a rise in the interest rate Federal Reserve Banks pay on the deposits commercial banks keep with them, from 0.10% to 0.15% per year. This represents a very slight “tightening move.” However, as is usually the case, more attention was paid to the tone of the FOMC report than on any concrete decisions made.
Speculators in the gold market, commodities markets, bond market, and stock market hang on every phrase of Federal Reserve statements. The general reaction was that the FOMC indicated that it would move to “tighten” its stance sooner than had been expected. As a result, the price of stocks fell while the U.S. dollar rose sharply against gold.
The Fed’s leadership is nervous about the dollar’s recent weakness against gold and a surge in primary commodity as well as wholesale and consumer prices. Though the FOMC repeated its belief that the current surge in inflation will soon taper off, it no longer seems so sure. As I explained last month, Fed leaders cannot ignore the very real danger that dollar weakness and rising inflation could signal a return to “stagflation” over the next several years and the sharp rise in interest rates and deep recession that inevitably follow.
The Federal Reserve System’s leaders hope to guide the U.S. and world capitalist economies onto a path of a sustained rise in the global industrial cycle, which would normally be expected to last about nine years. They hope that the cyclical upturn will be stronger than the one that followed the Great Recession. But they have to reckon with the very real danger that the current apparent upturn in the worldwide industrial cycle will abort if the Fed allows the dollar to plunge against gold causing inflation and interest rates to rise.
This would make a deep global recession with soaring unemployment inevitable, perhaps before the end of Biden’s four-year term. Far worse from the viewpoint of U.S. imperialism, it would endanger the dollar system, which forms the foundation of the U.S. global empire.
Ultimately, the decisions of the Federal Reserve and its Open Market Committee are constrained by the economic laws that govern the circulation of money. This is why Pichit Likitkijsomboon’s article in Monthly Review critiquing what he calls the “anti-quantity theory of money” takes on special importance. Before we continue our examination of his critique, let’s take a brief look at the current economic situation.